DuPont model profit margin

The DuPont model incorporates profit margin and asset efficiency to find ROA. Profit margin is calculated from values on the income statement. Asset efficiency, as measured by total assets turnover, is calculated from values on the income statement and balance sheet. 

With the revised DuPont model, notice that ROA is 2.03% and ROE is 4.65%, both of which are improvements over the current distribution network. Furthermore, EBIT and net profit margin both improve (Table 8.10). While fixed asset turnover declined slightly, the overall improvements outweigh any slight decline in this ratio. Moreover, since earnings per share (EPS) is important to Wall Street and executives alike, seeing that EPS improves since net profit increased to 8.33M and provided the number of shares has not increased. However, if the company increased the number of shares to raise capital for this project instead of using their own cash, then EPS may decline. 

Compare the two DuPont models the inventory account is reduced, as are the fixed assets. It is reasonable to expect that if inventory is reduced, the need for capacity is also reduced. This leads to reducing fixed assets (PP E). Although operating expenses (and COGS in other scenarios) remain the same in this example, it is not unreasonable to see this particular account decrease when inventory moves from the balance sheet to the income statement as inventory is sold. If operating expenses and COGS accounts decrease, profit margins increase. 

As discussed earlier, the sourcing department has an incredible opportunity to improve corporate financial and operational performance. They have the ability to lower COGS, increase profit margins, reduce inventory, and improve inventory and asset performance ratios. The DuPont model is once again used to demonstrate these effects. Using the income statement and balance sheet, the DuPont model is created for a company s current position or base case (Figure 10.6). 

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